Thomas Adams

January 25, 1998

 

Minister Jim Wilson, M.P.P
Minister of Energy, Science and Technology
900 Bay St., 4th Fl
Toronto, Ontario
M7A 2E1

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by fax: 327-6754 (five pages)

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Dear Mr. Minister:

The following remarks are in response to your letter of December 19, 1998 about the Ontario Energy Board’s “Advisory Report to the Minister of Energy, Science and Technology on Legislative Change Requirements for Natural Gas Deregulation”.

Energy Probe supports the continued evolution toward a more deregulated market for natural gas in Ontario. Since 1985, natural gas deregulation has saved Ontario consumers billions of dollars. Given the environmental attractiveness of natural gas relative to competing fuel sources, natural gas deregulation in Ontario has been environmentally beneficial. This province’s ground breaking gas deregulation initiative is now a model for North American energy markets.

Energy Probe supports legislative changes to:

• enable gas commodity title transfers in Ontario,
• continue regulation of the monopoly storage, transportation, and distribution functions of the local distribution companies,
• enable the OEB to actively promote customer protection and customer education,
• permit the Board to choose the most appropriate and costs effective means of regulating monopoly services including performance-based regulation,
• replace the obligation to sell for utilities with an obligation to deliver, and
• give the Ontario Energy Board a duty to promote competition. 

We have addition proposals for legislative changes in the conclusion section of this letter.

Customer Protection

Energy Probe shares the OEB’s concerns about problems caused by some gas marketers selling to homeowners. Some marketers are asking customers to sign long term contracts at prices well above current prices, and although it is conceivable that market prices might rise, leaving these customers better off than they might be otherwise, it is more reasonable to assume that a more fully competitive market would result in much lower contract prices.

The deficiencies of some of the retail offerings now in the natural gas market place could be reduced if customers had better information about gas costs and what they are actually paying for on their gas bills. The root cause of much of the customer confusion that exists is not adequately addressed in the OEB’s report. We believe that the root cause of this confusion is a history of inappropriate regulation of gas rates. The only information homeowners on system gas received on their bills was based on inherently inefficient and confusing cost calculations- the weighted average cost of gas (WACOG) and the purchase gas variance account (PGVA). Ordinary customers have virtually no way to figure out what they really pay for gas. In future, if regulated rates include gas costs, customers should receive clear price information so that they can compare prices with the offerings of competitors.

Replacing of System Gas

All of the customer and system services now served by system gas can be replaced by an expanded, Ontario-based physical spot market in gas. This market has not developed because of legislative impediments. Energy Probe has prepared several papers on this subject, including “Proposed Gas Independent System Operator in Ontario” (Energy Analects, June 9, 1998).

Regulating Market Power

The Ontario Energy Board does not have experience with monitoring and controlling market power. The OEB will have to develop this capacity and should coordinate with the federal Bureau of Competition Policy.

Market Design Taskforce

Energy Probe supports the formation of a market design taskforce to assist in making the transition to a more fully deregulated gas market.

Licensing

 

Energy Probe urges the government to ensure that licensing does not represent a barrier to entry into the competitive gas market. Large brokers and utility affiliates will have little difficulty going through the administrative procedures to acquire licenses. The government should focus on the needs of small marketers and prospective new market entrants so that these groups can help discipline the market place.

Licensing should only by administered through OEB and not delegated to other groups. Industry groups lack the independence that should be a prerequisite for licensing.

If licensing is to be introduced, very tight definitions of conditions should be required to make the adjudication process as predicable and objective as possible.

Regulatory Process: Powers

The Ontario government should grant the Ontario Energy Board the power to order divestiture of non-monopoly enterprises and functions. The OEB has proposed that it be granted the power to order either the removal from regulation, or redefinition of, current LDC services. This proposal is good as far as it goes but should go further. The OEB would be better able to meet the requirements of its mandate if it had the power in the new legislation to order divestiture of utility affiliates operating in non-monopoly businesses if this divestiture is found to be necessary to promote competition and to prevent cross subsidies. The Board may not have to exercise this power often, but having this power is likely to improve the Board’s ability to influence utilities in the public interest.

The future regulatory regime should enshrine the principle that the costs of regulation, whether for the regulated enterprise, the regulator or intervenors, should be internalized within regulated enterprises and borne by beneficiaries of regulation The OEB should retain the power to allow or deny the recovery of costs by utilities and intervenors.

The Ontario Energy Board should be required to monitor and regulate not just the cost of service to customers but also the quality of that service so that customers are protected from any utility efforts to cut costs at the expense of service.

Regulatory Process: Maintaining Adjudicative Regulation

The recommendation at page 44 of the Board’s report on legislative change suggests that the Ontario Energy Board should emerge from the adjudicative model of regulation and pursue

rulemaking powers in response to emerging markets and the need for prospective, flexible, and participatory rules.

If the government is considering empowering the OEB with rulemaking powers, it is essential that these new powers are designed so as to compliment the continuing role that the adjudicative model must continue to play. The quasi-judicial role of the OEB has served gas customers well as a serious opportunity for informed decision making. Rulemaking has the potential for reducing the independence and impartiality of the Board and reducing the opportunity for public interest organizations to participate as intervenors in quasi-judicial proceedings, with opportunities for cross examination, evidence, and costs.

The major challenge for the government is to understand the competing roles of the rulemaking and adjudication in regulating modern markets. While rulemaking is often necessary as a result of a maturing market, there remains a central and continuing role for adjudication. The judicial or quasi-judicial process continues to function as the most effective means of “searching for the truth” in complex and factual adversarial matters.

In Ontario, parts of the electrical and gas markets are being opened to competition, while other parts of the business will remain within the monopoly business. In the past, the OEB has regulated the natural gas monopoly rates through a quasi-judicial adjudicative model. The model worked very well at keeping gas rates competitive. The deregulation of functions that are naturally competitive and no longer in need of regulation raises new problems

In contrast, Ontario Hydro is subject to quasi-judicial hearings regarding rate increases but not subject to binding decisions. Until now, OEB Hydro rate hearings have been elaborate notice and comment processes similar to the current process for approving federal legislation. The weakness of the current oversight of Hydro belies any move to replace the OEB’s current adjudicative model for regulating gas rates with a rulemaking notice and comment procedure. If the evidence underlying the Board’s decisions is not tested in an adjudicative process, with rights to cross examination, opportunity to lead evidence, and binding decisions, the OEB moves closer to the model that Ontario Hydro has operated under in the past and away from the model that has regulated natural gas. This would be an unfortunate circumstance.

The challenge for the government will be to protect the OEB’s traditional adjudicative function, while at the same time empowering it with rulemaking powers to regulate the emerging markets. An example is that rulemaking powers are needed to respond to the serious concerns over

unregulated agents, brokers and marketers that are now beyond the scope of the OEB’s regulatory powers while continuing to adjudicate general rate applications.

The choice between adjudication or rulemaking, as an appropriate means of controlling and structuring discretion is an important one that requires a balanced view of the competing paradigms. There is no more public and accessible regulatory process in Ontario that carries as much authority as the OEB does in setting gas rates. The challenge now is for the OEB is to adopt rulemaking powers to include greater public consultation, prospective rulemaking, and regulation to meet the challenges of a maturing gas and newly opening electricity markets without weakening needed, continuing adjudicative regulation over monopoly services.

Conclusions

In addition to the bullets at the beginning of this letter outlining powers for the OEB, Energy Probe recommends that the new OEB legislation make provisions for the following:

• the power in the new legislation to order divestiture of utility affiliates operating in non-monopoly businesses if this divestiture is found to be necessary to promote competition and to prevent cross subsidies

• The future regulatory regime should enshrine the principle that the costs of regulation, whether for the regulated enterprise, the regulator or intervenors, should be internalized within regulated enterprises and borne by beneficiaries of regulation The OEB should retain the power to allow or deny the recovery of costs by utilities and intervenors. 
• The Ontario Energy Board should be required to monitor and regulate not just the cost of service to customers but also the quality of that service so that customers are protected from any utility efforts to cut costs at the expense of service. 

We apologize the our delay in filing our remarks.

Sincerely,

Thomas Adams
Executive Director

c. Marie Rounding, Chair, Ontario Energy Board